SAMPO GROUP LIFE INSURANCE

Transcription

1 1 / KALEVA MUTUAL INSURANCE COMPANY ANNUAL REPORT

2 2 / 53 CONTENTS REPORT OF THE BOARD OF DIRECTORS PROFIT AND LOSS ACCOUNT BALANCE SHEET CASH FLOW STATEMENT ACCOUNTING PRINCIPLES PREMIUMS WRITTEN CLAIMS PAID TOTAL OPERATING EXPENSES BY FUNCTION BREAKDOWN OF NET INVESTMENT INCOME INVESTMENTS AT FAIR VALUE AND VALUATION DIFFERENCES SHARES IN OTHER COMPANIES AND PARTICIPATIONS IN OTHER INVESTMENTS HELD BY THE COMPANY STATEMENT OF CHANGES IN EQUITY BREAKDOWN OF GUARANTEE CAPITAL LIABILITIES KEY FIGURES CALCULATION METHODS FOR THE KEY FIGURES AUDITORS REPORT RISK MANAGEMENT NOTES SUPERVISORY BOARD STATEMENT OF THE SUPERVISORY BOARD AUDITORS BOARD OF DIRECTORS KALEVA S ELECTED REPRESENTATIVES OWNERS OF KALEVA S GUARANTEE CAPITAL KALEVA S BOARD -APPROVED TARGETS PERTAINING TO THE DISTRIBUTION OF SAVINGS INSURANCE AS OF 1 JAN

3 3 / 53 SAMPO GROUP 1% Kaleva s holding in Sampo.6% ( ) Kaleva Mutual Insurance Company and Mandatum Life Insurance Company Limited (Mandatum Life) together manage Sampo Group s life insurance business in. The companies handle the life or pension insurance cover of a total of around 7, Finns and just over one fifth of the sector s combined insurance savings of EUR 48.6 billion. Pure risk insurance and the life insurance offering for savings and investor customers are an essential element of Sampo Group s strategy. Sampo plc s subsidiary, Mandatum Life, offers comprehensive services for building up wealth, preparing for retirement, encouraging the commitment of a company s employees and managing life & health risks. In terms of sales, Mandatum Life s core product areas consist of unit-linked savings contracts and group pensions, as well as risk insurance. Kaleva specialises in selling group life and accident insurance. The target groups are the members, as well as their families, of trade unions and employee organisations who have signed a co-operation agreement with Kaleva. The members of roughly 9 organisations and their families are covered by the co-operation 1% 5% Sampo owns 5% of Kaleva s guarantee capital agreement and the group-specific benefits that come with it. Sales, management and claims for Primus life and accident insurance granted by Kaleva are handled by If. Primus offers the best price/quality ratio for this type of insurance. Affordable life and accident insurance for the whole family can also be purchased conveniently through Kaleva s online store Nearly all of the members of If s and Kaleva s co-operation organisations use their organisation s extranet service ( where members can, via their organisation s web pages, learn about the benefits available to them. Kaleva also bears responsibility for individual risk and life insurance savings policies taken out prior to 1997, with Mandatum Life handling customer service and claims for the policies. As a mutual company, Kaleva is not part of the Sampo Group, but it does co-operate closely with Mandatum Life and If. For more information about Kaleva s operations, please visit

4 4 / 53 KALEVA S KEY FIGURES 216 Kaleva MEUR Premiums written (on own account) Claims paid (on own account) Change in technical provisions before bonuses and change in equalisation provision Net investment income Operating expenses Balance on technical account before bonuses and change in equalisation provision Other income and expenses Operating profit Change in equalisation provision Bonuses Profit before extraordinary items, appropriations and taxes Expense ratio, % 58 6 Average number of personnel 11 1 Technical provisions (on own account) Balance sheet total Valuation differences ,237 1,

5 5 / 53 For Kaleva, 216 was again a year of consistent performance. The company s solvency remained strong and investment performance was good. We increased our customers insurance savings through substantial bonuses, in addition to the 4.5% technical rate of interest. Our market share in pure risk life insurance for households rose to 19.7 per cent in euros. We launched a web page called Varaudu ajoissa on the online store henkivakuutuskuntoon.fi. The web page offers insurance tips and was positively received by our customers. Paula Salonen CEO until 31 Dec. 216 Timo Laitinen CEO as of 1 Jan. 217

6 6 / 53 Kaleva is s oldest and most progressive life insurance company. The company was established in 1874 and is now 143 years old. Kaleva sells more life insurance policies digitally than any other operator in the market. In 216, Kaleva continued to produce steady results and took further steps in making use of new technology in sales and customer service. When death occurs, life insurance provides the next of kin with important financial assistance. In 216, Kaleva paid EUR 39 million in death, illness and disability benefits to approximately 75, insured persons. In the second half of the year, customers raised questions about the change in taxation related to life insurance benefits. Based on the change, the previously tax-free portion of life insurance benefits is now subject to inheritance tax like the rest of a deceased person s assets The change will take effect at the start of 218, following a transitional period. The change does not eliminate the need for life insurance, as the beneficiaries can immediately make use of the death benefit to pay off other inheritance tax. For example, it can take a long time to realise certain inherited assets, such as property. For most Finns, ensuring that their next of kin have a source of income is important, as the death of a provider can mean a substantial decrease in the family s income. Solvency was strong Investment performance was good Insurance savings were increased through substantial bonuses, in addition to the 4.5% technical rate of interest Market share of life insurance grew New customer services were launched and well received 2 % 15 % 1 % 5 % Return on Kaleva s investment portfolio (at fair value) Be prepared % In charting Finns views on risks, life and health risks were foremost on their minds. Finns are also well aware that protecting themselves against risks means preparing for them through insurance. Despite their awareness of risks, life insurance cover has remained low among Finns: only a third of working-age Finns has life insurance, and even then, the average amount of cover is quite low. People take better care of and are more likely to insure their possessions. -5 % -1 % -15 % Return, % Annualised return in 24216: 7.2%

7 7 / 53 Following a death, help is also needed in sorting out day-to-day practical matters. The Varaudu ajoissa service on Kaleva s website henkivakuutuskuntoon.fi serves as a clear guide in such matters for instance, making funeral arrangements, drawing up a will and closing down social media accounts. There was clearly a need for such a service just a few months after its launch, the service had already received roughly 1, visitors. Kaleva s total premiums written rose to EUR 64.9 million, and the company s market share in pure risk life insurance for households increased to 19.7%. Kaleva sold 23, new Primus policies. The share of insurance sold through increasingly important digital channels was 2%. As a specialised operator, Kaleva is in an excellent position to develop and update services quickly in line with customers operating methods and expectations. At year-end, Kaleva had 235 customers and 375 insured Between , Kaleva credited its customers savings with a substantial EUR 52 million in bonuses. These so-called terminal bonuses are determined in connection with the expiry of the insurance policies. In 216, bonuses paid and the change in the provision for bonuses totalled EUR 26 million. Fewer customer savings insurance policies matured in 216 than in the last few years. A total of EUR 27 million in insurance savings was paid out, with bonuses accounting for EUR 15 million. When the interest rate level is low, it is important to secure the savings and cover that have already accrued to insurance policies. Kaleva prepared for this by supplementing the technical provisions for savings insurance by EUR 9 million and by further clarifying the terms of additional premiums. Solvency, investment operations and financial result Kaleva s ability to withstand the economic and investment market fluctuations in its operating environment is good, and the company is among the most solvent life insurance companies in. The company s solvency is roughly four times the required minimum. Kaleva s investment performance in 216 was good. The investment market and result were considerably influenced by the low interest rate level and the equity market, which bounced back from its low in the first half of the year. Success in investments demands thorough analysis of the opportunities and risks of investments, and taking measures based on such an analysis, in line with the investment policy decided on by the Board of Directors. Kaleva s investment portfolio amounted to more than EUR 1.5 billion, and the return on investments was 5.9%. Despite the challenging investment market, the return was sufficient to cover the 4.5% technical rate of interest on savings and investment insurance policies. Kaleva s book profit was EUR 11 million. Collaboration Employee organisations are Kaleva s main co-operation partners. A key aspect of the co-operation is communicating member benefits, and to enhance this communication, the Connections Tool was introduced. It has been well received and dozens of our co-operation organisations are actively using it. An important part of our work with organisations is Primus life and accident insurance, a benefit tailored for members and the most affordable on the market (FINE the Finnish Financial Ombudsman Bureau: Basic information about life insurance, 216) The discounts are substantial, even more than 7%. Allocation of investment portfolio , MEUR 1,341 Money Market Securities and Cash 16% Credit Bonds, Funds and Loans.3% Trading Derivatives 37% Interest rate derivatives 1% Equity 35% Real estate 5% Private Equity 2% Alternative 4%

8 8 / 53 Kaleva s sales, customer and administrative services are mainly realised by If P&C Insurance Company and Mandatum Life Insurance Company, and investment services by Sampo plc s investment unit. Expertise and cost effectiveness are the most important aspects of the partnership, which has been very successful, including in 216. In addition to productive and high-quality service, we have also jointly realised several measures related to administration, risk management, increased regulation and IT infrastructure maintenance, which would have been challenging for a specialised company to accomplish alone. Kaleva s expense ratio was 58%, which is the lowest it has been in years. Election year 217 Kaleva takes the form of a mutual insurance company. Its shareholders are the policyholders and the owners of the guarantee capital. The decision-making authority of the policyholder-shareholders is exercised at the Annual General Meeting by their elected representatives, who form Kaleva s representative body. The representative body is comprised of 3 elected representatives, and the terms of 15 representatives expire every four years. They are elected to continue or a new representative is chosen to replace them in elections that Kaleva s customers can participate in. 217 is another election year. The election will take place in November, and the deadline to send candidate applications to Kaleva is 5 October 217. The condition for being a candidate is that the customer holds Kaleva insurance that was activated prior to 1 Jan This is an excellent opportunity for all customers interested in influencing Kaleva s operations Information about becoming a candidate, as well as details about the conditions for candidacy and voting is available at kalevavakuutus.fi. I encourage as many of Kaleva s customers as possible to join in the efforts to make Kaleva an even better life insurer. 14-YEAR-OLD KALEVA IN 1-YEAR-OLD FINLAND Life insurance is a business with a long horizon. Kaleva s oldest, still active, insurance policy dates back to It is likely that an insurance policy taken out today will still be active in the year 21. Kaleva will be needed then, too. For operators like Kaleva, it is important for the operating environment to be sufficiently predictable and stable. That does not mean stagnating, but instead continuous development and building something better. has provided an environment where these conditions have been realised and Kaleva, along with many others, has been able to succeed. We all know that it hasn t always been easy, but we will make it through tough situations in future, too. We cannot, however, choose our future; it will unfold in its own way and we will do just fine and Kaleva. 143-year-old Kaleva congratulates 1-yearold. Important work Kaleva s co-operation partners and personnel were important to the company s success in 216. With our direction clearly in mind, we have made decisive efforts together and as individuals towards our goals Kaleva exists for its customers. Important work was also done by the members of the company s Board of Directors and Supervisory Board and by Kaleva s elected representatives thank you. I took on the position of CEO at Kaleva at the start of 217. I was given a thorough and expert induction by my predecessor, Paula Salonen. Thank you, Paula, for your years of excellent co-operation and work as Kaleva s tenth CEO. I could not have asked for a company in better shape and with more interesting customers to lead. Helsinki, March 217 Timo Laitinen CEO

9 9 / 53 FINANCIAL STATEMENTS 216

10 1 / 53 REPORT OF THE BOARD OF DIRECTORS 216 Life insurance companies direct insurance premiums written in, MEUR DEVELOPMENT OF THE SECTOR IN FINLAND Premiums written in the life insurance sector fell 27.8 per cent from the previous year, to EUR 4,528 million (215: 6,275; source: Federation of Finnish Financial Services). Unit-linked premiums written were down 3.7 per cent, to EUR 3,812 million (5,55), and their share of the whole sector s premiums written stood at 84 per cent (88). Premiums written on with-profit insurance policies decreased 7.1 per cent to EUR 716 million (77). Insurance savings in the life insurance sector increased 4.3 per cent during the year and amounted to EUR 48.6 billion (46.6). Unitlinked insurance savings grew 8.8 per cent to EUR 34.2 billion (31.4). Households accounted for a 75 per cent (75) share of the sector s insurance savings Group pension insurance Individual pension insurance Pure risk life insurance Savings life insurance Capital redemption contracts Life insurance savings (The sector s Finnish business) With-profit, corporate Unit-linked, corporate With-profit, private Unit-linked, private under review amounted to EUR 64.9 million (63.6), of which individual life insurance policies accounted for EUR 35.2 million (34.9) and policies other than employees group life insurance for EUR 29.5 million (28.5). Continuous payments amounted to EUR 59.7 million (59.1). All of Kaleva s premiums written are related to with-profit business or to pure risk life insurance policies. As a pure risk life insurer for households, Kaleva s market position strengthened further. The company s market share rose from 18.6 per cent in the previous year to 19.7 per cent. In its main area of operations, i.e. providing group insurance benefits to members of trade unions and employee organisations, Kaleva is the clear market leader. Sales of Primus group life and accident insurance tailored to members of the organisations and their family members totalled some 23, policies. Structure of the Kaleva Group Investments On 31 December 216, Kaleva Mutual Insurance Company comprised, in addition to the parent company, five Finnish housing and real estate companies as subsidiaries. The market value of Kaleva s investment portfolio at the end of 216 was EUR 1,341 million (1,429). The portfolio consisted of 54 per cent (47) fixed income investments, bonds and deposits; 35 per cent (41) equities, and 1 per cent (11) real estate, and private equity fund and alternative investments. The allocation of the investment portfolio was in line with the target situation set in the investment plan. OPERATING RESULT Premiums written Kaleva s gross premiums written in the year

11 11 / 53 REPORT OF THE BOARD OF DIRECTORS 216 At the close of the year under review, foreign investments made up 57 per cent (57) of Kaleva s investment portfolio; some 17 per cent (15) of those investments were in euro-zone countries. Thirty-nine per cent (37) of equity investments and 75 per cent (79) of fixed income investments were made in foreign investees. At year-end, non-euro investments stood at EUR 472 million (415). Of that figure, 71 per cent (75) was hedged against exchange rate risks through forward contracts and option strategies. Market share of premiums written in 216 Pure risk life insurance for households total MEUR 27 Kaleva Mandatum Life Others 19.7% 9.1% 71.2% Valuation differences on investments at the end of the financial year were EUR 322 million (35), of which EUR 29 million (324) were related to equities. The duration of Kaleva s fixed income portfolio fell during the year to 1.6 years (1.9). The running yield on the fixed income portfolio decreased to 2.5 per cent (3.2). In the fixed income portfolio, the number and share of credit risk investments decreased. At the end of 216, these investments accounted for 68 per cent (86) of fixed income investments. The main focus of credit risk investments is still on Nordic corporate and bank bonds. In the course of the year, however, in- vestments were also made outside the Nordic countries, mainly in U.S. bonds. The amount and share of money-market investments increased considerably, mainly as a result of equity sales, and at the end of 216, money market investments accounted for 3 per cent (13) of fixed income investments. The fair value of Kaleva s direct real estate investments at the end of 216 was EUR 56 million (56). In addition, EUR 21 million (8) was invested in real estate funds. The return on the entire real estate investment portfolio, including changes in value and capital gains, was 4. per cent (14.7). At the end of 216, Sampo plc, with a market value of EUR 144 million (25), was by far Kaleva s largest equity holding and largest single investment. Net investment income on the profit and loss account was EUR million (99.4). The investment income includes EUR 67.1 million (79.5) in capital gains, EUR 27.8 (26.4) million in dividend yields, and EUR 6.3 million (9.5) in value readjustments. Investment expenses in 216 include impairments, depreciation and capital losses of EUR 5.7 million (18.). Kaleva s investment portfolio on 31 December 216 Money Market Securities and Cash 16% Government bonds.3% Credit Bonds, Funds and Loans 37% Interest rate derivatives 1% Equity 35% Real estate 5% Private Equity 2% Alternative 4%

12 12 / 53 REPORT OF THE BOARD OF DIRECTORS 216 Kaleva s technical provisions on 31 December 216 Private Optimi 39% Business Optimi 4% Traditional life insurance 5% Provision for terminal bonuses 37% Other technical provisions 6% Supplementary provision for the guaranteed interest rate 1% The return on Kaleva s investment portfolio calculated at fair value, was 5.9 (9.3) per cent. The average return on capital employed was also 5.9 per cent (9.3). tomer bonuses will be distributed in future. As a general rule, bonuses based on investment operations are granted through the terminal bonus system. Technical provisions, customer bonuses Claims incurred Kaleva s technical provisions at year-end totalled EUR 957 million (868), of which EUR 42 million (41) consisted of the provision for claims outstanding. The technical provisions were calculated using the same 4.5 per cent interest rate as for insurance premiums, except for the years , in which case the technical provisions were calculated using a discount rate of.5 per cent. The subsequent increase in the technical provisions is included as its own item in the provision for unearned premiums, i.e. the supplementary provision for the guaranteed interest rate, and amounts to EUR 92 million. Kaleva s claims incurred totaled EUR 8.3 million (25.9). Surrenders accounted for EUR 11.8 million (26.6) of claims paid. Bonuses in the amount of EUR 35 million (355) have been set aside in the provision for unearned premiums for payment upon the expiry of the savings insurance policies (i.e. terminal bonus system). The risk result was good, with the exception of the negative result for medical expenses insurance. The ratio of actual claims expenditure to collected risk premium income in 216 was roughly 79 per cent (74). Bonuses paid on death benefits increase the claims incurred, and discounts lower the risk income. Sickness and disability benefits were paid in Insurance savings were not granted customer bonuses for 216. It is also unlikely that cus- Claims paid include bonuses according to the savings insurance bonus system and which are determined upon the expiry of the insurance, in the amount of EUR 22.5 million (73.5). Approximately EUR 15 million of the bonuses were paid for savings that matured in accordance with the contract. The bonus paid upon the expiry of the insurance increased the amount of savings paid by an average of 118 per cent (73). Kaleva s claims paid, MEUR Death benefits Capital payments Sickness and disability benefits Surrenders

13 13 / 53 REPORT OF THE BOARD OF DIRECTORS 216 the amount of EUR 16.7 million (17.6) and death benefits in the amount of EUR 22.4 million (25.3). Medical expenses insurance premiums will be increased by a maximum of 15 per cent in 217. Operating expenses, staff Operating expenses entered in the profit and loss account amounted to EUR 7.7 million (8.4). A clearer picture of Kaleva s expenses development can be gained by adding the claims handling expenses entered under claims incurred to the figures above. According to that calculation, operating expenses amounted to EUR 9.8 million (1.2). Converted to full-time employees, Kaleva employed an average of 11 people (1) in 216. Cost items (loading income) collected on insurance policies were highly sufficient to cover operating expenses. The expense ratio was 58.1 per cent (6.2%) in the year under review. With the current extent of its business operations, Kaleva s expense result is expected to show a surplus also in the long term. Result and solvency The parent company s result for the financial year was EUR 11.3 million (24.5). Bonuses paid or set aside during the financial year lowered the parent company s result by EUR 25.8 million (99.7). The total result at fair value stood at EUR 2 million (14). The parent company recognised depreciation according to plan in the financial statements, however within the maximum depreciation permitted under the Finnish Act on Taxation of Business Income. Depreciation totaled EUR.6 million. The depreciation difference and also the total reserves in the financial statements amounted to EUR 1.3 million. Kaleva s solvency remained strong also with the introduction of the new Solvency II framework, which took effect on 1 January 216. The solvency requirement set by Solvency II is around EUR 115 million and the own funds is roughly EUR 455 million, calculated using the standard formula. Kaleva does not apply the transitional rules related to technical provisions in its calculations. In calculating the equity risk, Kaleva applies the transitional rules for the capital requirement on Solvency II (transitional rule in force until 223). The solvency requirement without the transitional rule on equity risk would be around EUR 14 million. Kaleva s balance sheet total was EUR 1,237 million (1,153), and equity amounted to EUR 264 million (253). Expense ratio, % Outlook Kaleva s operations are focused on providing group insurance benefits to members of trade unions and employee organisations. Sales of Primus, a product tailored to the members of the organisations, are expected to remain brisk also in 216. The share of online sales in particular is expected to grow considerably in the coming years. Gender-neutral premium pricing entered into effect as of 21 December 212 in all EU countries. The change seriously breaches one of the key principles of insurance operations i.e. risk-based pricing. Premium pricing for Kaleva s Primus has also always taken into consideration the claims experience of the respective trade or employee organisation. On the basis of at least approximate voca

14 14 / 53 REPORT OF THE BOARD OF DIRECTORS 216 Solvency capital as a percentage of technical provisions, % tion and age, Kaleva will also be able to offer the most affordable personal insurance in the sector to the members of its co-operation organisations. The EU s new Solvency II framework entered into force on 1 January 216. introduced some of the new regulations on corporate governance already in 214.The new solvency requirements will not cause problems for Kaleva. However, the detailed documentation and extremely broad scope of reporting to the authorities prescribed by Solvency II will still require a lot of work within the company. Kaleva s strong solvency position, cost-effective operating model and good investment portfolio should make it possible for the company to engage in successful business also in future As of 1 Jan. 216, solvency capital is not officially calculated Kaleva s strong solvency position, cost-effective operating model and good investment portfolio should make it possible for the company to engage in successful business also in future. Kaleva s risks consist of market risks, credit risks, underwriting risks, risks related to various internal processes, i.e. operational risks, legal and compliance risks, reputation and business risks, and regulatory risks. all of the company s risks; the scope of the plan is laid down, for instance, in the regulations of the Financial Supervisory Authority. Closely related to the risk management plan is the continuity plan created to ensure the continuity of operations; the plan is maintained and tested regularly. The continuity plan also includes a contingency plan for exceptional situations. The company s Board of Directors annually approves a risk management plan that covers The financial statements include a note on risks and risk management, explaining Risk management Kaleva s general risk management principles, risk management responsibilities and control, organisation as well as processes and risks. Corporate Governance Kaleva s Annual General Meeting on 2 April 216 confirmed the number of Supervisory Board members at 25. The following members whose terms were due to expire were re-elected to the Supervisory Board: Eila Annala, Matti Bergendahl, Timo Korpijärvi, Tarja Munukka, Heidi Nieminen, Erkki Solja

15 15 / 53 REPORT OF THE BOARD OF DIRECTORS 216 and Jore Tilander. Tommi Grönholm was elected as a new member of the Supervisory Board. Chairman; and other members, Professor Eero O. Kasanen, CEO Timo Vuorinen and CIO Pekka Pajamo. The term of office for all elected members will last until the close of the 219 Annual General Meeting. Paula Salonen was the company s CEO in 216. At its meeting on 31 October 216, the Supervisory Board elected Antti Palola as its Chairman and Pekka Piispanen as Deputy Chairman until the election to be held after the next Annual General Meeting. At the same meeting, the Supervisory Board decided that the number of members on the Board of Directors would be five. Board members Ville-Veikko Laukkanen and Timo Vuorinen, whose terms had expired, were re-elected for the three-year term of Serving as members of the Board of Directors for the entire year under review were CEO Petri Niemisvirta as Chairman; Senior Vice President Ville-Veikko Laukkanen as Deputy THE BOARD OF DIRECTORS PROPOSAL FOR THE DISTRIBUTION OF PROFITS Kaleva Mutual Insurance Company s distributable equity in the financial statements amounted to EUR 255,165, The Board of Directors proposes that the profit of EUR 11,345, for the financial year be transferred to the contingency fund. The Board additionally proposes that EUR 84,. in interest be paid on the guarantee capital. If the proposal is approved, the company s reserves will be as follows: Guarantee capital EUR 8,49, Initial fund EUR 168, Contingency fund EUR 254,183, Other funds EUR 142,31.36 Total reserves EUR 262,93,432.44

16 16 / 53 PROFIT AND LOSS ACCOUNT EUR 1, , ,676 63, , , ,564-8,26-1,294-81,554-25,927 16, ,286-87,672 59,771 Operating expenses -7,562-8,368 Investment expenses -49,74-74,26 11,449 24, ,345 24,546 TECHNICAL ACCOUNT Premiums written Premiums written Reinsurers share Investment income Claims incurred Claims paid Change in the provision for outstanding claims Change in the provision for unearned premiums Balance on technical account NON-TECHNICAL ACCOUNT Other income Other expenses Appropriations Change in depreciation difference Income taxes Profit/loss for the financial year

17 17 / 53 BALANCE SHEET EUR 1, ASSETS INTANGIBLE ASSETS Other long-term expenses INVESTMENTS Real estate investments Real estate and real estate shares Loans to Group companies Other investments Shares and participations Debt securities Other loan receivables RECEIVABLES Other receivables OTHER ASSETS Tangible assets Equipment and machinery Other tangible assets Cash at bank and in hand PREPAYMENTS AND ACCRUED INCOME Accrued interest and rent Other prepayments and accrued income ,866 11,19 38,56 27,959 11,825 39, ,351 56, , ,92 63, ,38,564 1,19,649 1,78,349 3,767 3,767 9,714 9, ,96 26,151 56,977 57,32 6, ,136 1,237,12 7, ,733 1,153,357 EUR 1, LIABILITIES EQUITY Guarantee capital Initial fund Other funds Contingency fund At the disposal of the Board Profit for the financial year ACCUMULATED APPROPRIATIONS Depreciation difference TECHNICAL PROVISIONS Provision for unearned premiums Provision for claims outstanding LIABILITIES From direct insurance operations From reinsurance operations Other liabilities ACCRUALS AND DEFERRED INCOME , , , , , , , ,238 1,37 1,37 1,841 1, ,777 42, ,25 827,15 41, , ,546 11, ,516 23,748 2,977 1,237,12 6,246 1,153,357

18 18 / 53 CASH FLOW STATEMENT EUR 1, CASH FLOW FROM OPERATIONS Profit (loss) on ordinary operations/profit (loss) before extraordinary items Adjustments Changes in technical provisions Impairments and revaluations on investments Unrealised exchange rate gains/losses Depreciation according to plan Other adjustments Cash flow before change in working capital Change in working capital Increase (-) / decrease (+) in non-interest-bearing short-term receivables Increase (-) / decrease (+) in non-interest-bearing short-term liabilities Cash flow from business operations before financial items and taxes Interest paid on other financial expenses from operations Direct taxes paid Cash flow before extraordinary items CASH FLOW FROM OPERATIONS ,449 24,926 88,966-2,416 1, ,978 38,83-76, ,1-12, ,691 29,13 4,971-15, ,343-4, ,673-2, ,315 23, ,315 CASH FLOW FROM INVESTMENTS Capital expenditure on investments (excl. financial resources) Capital gains from investments (excl. financial resources) Investments and gains on intangible, tangible and other assets (net) -23,65 329,892-48, , CASH FLOW FROM INVESTMENTS 126,286 15, CASH FLOW FROM FINANCING Dividends paid/interest paid on guarantee capital and other profit distribution CASH FLOW FROM FINANCING CHANGE IN FINANCIAL RESOURCES Financial resources, 1 Jan. Financial resources, 31 Dec. 149, ,261 56, ,238 26,96 56, , ,261 The items in the cash flow statement cannot be derived directly from the balance sheets due to, among other things, exchange rate movements.

19 19 / 53 NOTES ACCOUNTING PRINCIPLES The financial statements have been compiled in compliance with the Insurance Companies Act, the Ministry of Social Affairs and Health s decree on the financial statements and consolidated accounts of insurance companies, and the Financial Supervisory Authority s regulations and guidelines. The financial statements comply with the regulations of the Limited Liabilities Act and the Accounting Act, and with the Accounting Decree insofar as is provided for in the Insurance Companies Act and the Ministry of Social Affairs and Health s decree. Consolidated accounts and consolidation of associated undertakings Kaleva Mutual Insurance Company s subsidiaries and associated undertakings are not included in the consolidated accounts by virtue of Chapter 6, sections 3 and 12 of the Accounting Act, which states that consolidation is not required if it is not necessary to provide a true and fair view of the group s operational result and financial position. Therefore, since the consolidated accounts do not differ from the parent company s financial statements, the company has not drawn up a separate consolidated balance sheet and profit and loss account or notes on the group s accounts and a consolidated cash flow statement since 212. Notes on the accounts of subsidiaries and associated undertakings are in accordance with Chapter 4, Section 3 of the Accounting Decree. Foreign currency items Foreign currency receivables, investments and liabilities in the nature of receivables have been translated into euro using the average rate of the European Central Bank on the balance sheet date. Other investments have been valued at the exchange rate at the time of the acquisition or at the lower closing rate on the balance sheet date, with the exception of shares in the nature of investment assets, in the valuation of which the impact of the exchange rate and the market value have not been presented as separate items. Exchange rate differences in receivables and investments are presented in investment items under other income and expenses from other investments. Real estate shares are entered in the balance sheet at acquisition cost or the lower fair value. Buildings and structures are presented at acquisition cost less the planned depreciation or the lower fair value. Previously recorded impairments on investments are re-adjusted to no more than the original acquisition cost and entered through profit or loss if the fair value increases. Impairments in real estate investments in the nature of fixed assets are entered based on their materiality and permanency. The book value of certain properties and real estate shares contains revaluations made in previous years. The acquisition cost includes purchase- and manufacturing-related variable costs. Stocks and shares in the nature of investment assets are presented at acquisition cost or the lower fair value. The acquisition cost is calculated using the average price. Previously recorded impairments are readjusted to the value of the shares and participations where the fair value exceeds the book value. Shares and participations in the nature of fixed assets are entered at their acquisition cost or the lower fair value, if the impairment is considered permanent. Intangible assets and equipment are entered in the balance sheet at acquisition cost less planned depreciation. Other long-term expenses that have been capitalised are, among other things, in-house-designed computer systems and renovations carried out on leased premises. Debt securities consist of bonds and other money market instruments. They are entered in the balance sheet mainly at acquisition cost. The difference between the nominal value and acquisition cost of debt securities is allocated to interest income with their acquisition cost Valuation and allocation as the counterpart. Interest income is allocated using the effective interest method over the remaining life of the contract. With this method, interest income is evenly allocated over the remaining life of the financial instrument in relation to the instrument s balance sheet equity. The amortised acquisition cost is lowered only through impairments caused by other than fluctuations in the general interest rate level, and impairments are readjusted if the fair value of the debt security later rises above the reduced acquisition cost to no more than the original acquisition cost. Receivables and investments in the nature of receivables are presented at their nominal value or at the lower fair value. Credit losses related to the capital of investments in the nature of receivables are treated as impairments. Derivative contracts are valued at their fair value on the balance sheet date. The negative difference between the fair value of the derivative contracts treated in the accounts as non-hedging and a higher book value/contract rate is entered as an expense. Revaluations of investments in the nature of investment assets, and adjustments thereof, are recognised through profit or loss and presented on their own line under Net investment income. Revaluations of investments in the nature of

20 2 / 53 NOTES fixed assets and their reversals are entered in the revaluation reserve under restricted equity. The difference between the book value of the investments and the acquisition cost presented in the notes consists of revaluations and the accrual of shares of associated undertakings according to the equity method. Depreciation Intangible assets and buildings as well as their components, furniture and fixtures are depreciated according to plan as maximum depreciations according to the Business Tax Act. Depreciation Intangible rights Goodwill Goodwill and negative goodwill on consolidation Other long-term expenses Depreciation Buildings based on use Components in buildings Computer hardware and vehicles Other equipment Years of straight-line depreciation net expenditure % Depreciation according to plan corresponding to the average economic useful life of the buildings is made annually for revaluations entered as income for buildings belonging to real estate in the nature of investment assets. Fair values The fair value of financial instruments with reliable markets is the public trading bid price at the closing date or, in the absence of such, the latest closing price. If a public quotation for the financial instrument as a whole does not exist, but functioning markets for its various parts exist, the fair value is defined on the basis of the market prices of those parts. The fair value of other financial instruments and deposits can be defined using generally accepted valuation methods, and if a reliable fair value cannot be defined using these methods, the fair value can be considered the probable selling price or the amortised or remaining acquisition cost. Other insurance company shares that do not have a market value are valued at the cautiously estimated probable selling price or, in the absence of such, the net asset value. Shares of group companies are valued at their net asset value or remaining acquisition cost and those of associated companies are valued using the equity method or the net asset value. Loan receivables and deposits with ceding undertakings are valued at par value or the lower probable value. The fair values of real estate and real estate shares are determined item by item as prescribed by the Financial Supervisory Authority s regulations and based on the opinions of the company s own and external experts, on a case-by-case basis. Expenses by function Internal operating expenses and depreciation on capitalised IT systems and equipment are entered in the profit and loss account according to function. Some of these are allocated directly to the functions, some on the basis of annual working time surveys. Thus, the proportional share of the functions varies annually. Function-specific expenses are presented in the profit and loss account under operating expenses (insurance policy acquisition costs, management expenses, and administrative expenses), claims paid (claims administrative charges), investment expenses (costs arising from the administration of real estate and other investment activities). Other income and expenses In addition to the depreciation on goodwill and goodwill on consolidation, as well as the deduction of the negative consolidation difference, the item Other income and expenses also includes items that have a clear connection to the group s core operations. Taxes and appropriations Income taxes Direct taxes in the profit and loss account are entered on an accrual basis. Deferred tax The company has no significant differences arising from temporary timing differences between accounting and taxation. Accumulated appropriations On the basis of Finnish regulations on accounting and taxation, companies are allowed to include certain voluntary provisions with a tax effect and depreciation above plan in their financial accounts. Voluntary provisions and the difference between the depreciation according to plan and the deductible permitted in corporate taxation are entered in the profit and loss account under the item appropriations, and the accumulated difference is entered in the balance sheet under the item accumulated appropriations. Appropriations and their accumulations are presented without deducting the deferred tax liability arising from them.

21 21 / 53 NOTES Technical provisions Technical provisions are divided into the provision for unearned premiums and the provision for outstanding claims according to whether the insured event occurred before or after the balance sheet date. Most of the provisions are discounted. The discount rate used to calculate the technical provisions is in compliance with the calculation bases approved by the company s Board of Directors and fulfils the requirements of the Ministry of Social Affairs and Health s decree 61/28. The provision for unearned premiums is calculated for each policy. The provision for unearned premiums is discounted using the 4.5 per cent technical rate of interest used in the premium bases. The discount rate used in calculating Kaleva s provision for unearned premiums is, with the exception above,.5 per cent for the next five years (217221). The difference between the.5 per cent discounted provision for unearned premiums and the 4.5 per cent discounted provision for unearned premiums between 217 and 221 has been supplemented in the technical provisions, under the name supplementary provision for the guaranteed interest rate. Zillmerisation has not been used in calculating the provision for unearned premiums. The provision for bonuses determined upon the expiry of a savings insurance policy is entered as an estimate of the amount to be paid in connection with the savings sums and deaths in 217 and the possible maximum amount in connection with surrenders as of 1 January 217. When calculating the provision for claims outstanding, discounting is used only for the provision for claims outstanding for current pensions. The provision for unearned premiums for current pensions is discounted by the 4.5 per cent technical rate of interest used in the premium bases. Principle of fairness in life insurance According to Chapter 13, Section 2 of the Finnish Insurance Companies Act, life insurance must follow the so-called fairness principle with respect to policies that, under the insurance contract, give entitlement to bonuses granted on the basis of a possible surplus generated by the insurance policies. If the solvency requirements do not prevent it, a reasonable proportion of the surplus must be refunded to the insurance policies in the form of a bonus. Kaleva s bonus system applies to both pure risk and life insurance savings business. The surplus from pure risk life insurance business is refunded to the policyholders in the form of increased death benefits and premium discounts. In addition to the technical rate of interest, investment returns are credited to life insurance savings policies as annually decided customer bonuses while the insurance is valid and as supplementary bonuses after the insurance expires. The company is committed to keeping its solvency at a level that does not restrict the payment of bonuses to policyholders or the interest paid to the holders of the guarantee capital. Pension arrangements The company is committed to keeping its solvency at a level that does not restrict the payment of bonuses to policyholders or the interest paid to holders of the guarantee capital. Statutory pension cover has been arranged for Kaleva s staff under the Employees Pensions Act (TyEL insurance). In addition, the company has supplementary pension arrangements that are handled by an insurance company. Pension insurance premiums are entered in the profit and loss account on an accrual basis.

22 22 / 53 NOTES EUR 1, DIRECT INSURANCE PREMIUMS WRITTEN Life insurance Other individual life insurance Other accident and health insurance Employees group life insurance Other group life insurance 64,851 64,851 63, ,593 35,26 11, ,624 64,851 34,864 11, ,52 63,552 Continuous insurance premiums Single premiums 59,651 5,2 64,851 59,11 4,442 63,552 Premiums from with-profit policies 64,671 63,376 Direct business Life insurance Other accident and health insurance Total claims paid 73,522 6,738 8,26 199,337 6,59 25,927 Surrenders Savings amounts Other Total claims paid 11,755 27,339 41,165 8,26 26, ,548 44,753 25,927-3,334-22,484-26,138-73,529-25,818-99,668 2 CLAIMS PAID 3 Bonuses paid on risk insurance and change in the provision for bonuses Terminal bonuses paid Impact of bonuses on life insurance policies reserved and paid for during the period on the balance on the technical result ,94 2,1 3,15 1,421 2,76 4,182 3,6 1, ,562 2,296 1, ,368 2,172 7,562 3,12 12,836 1,798 8,368 3,641 13,87 4 TOTAL OPERATING EXPENSES BY FUNCTION 1 PREMIUMS WRITTEN Direct business Reinsurance Premiums written before reinsurer s share EUR 1, OPERATING EXPENSES IN THE PROFIT AND LOSS ACCOUNT Insurance policy acquisition costs Direct business commissions Other insurance policy acquisition costs Insurance policy management expenses Administrative expenses Commissions on reinsurance ceded and profit sharing (-) TOTAL OPERATING EXPENSES BY FUNCTION Claims administrative charges Operating expenses Investment management charges

23 23 / 53 NOTES EUR 1, ,243 1, ,741 5, ,39 5,39 27,842 26,683 39,221 93,747 99,179 6,311 67, ,634 26,362 25,666 26,2 78,3 84,582 9,483 79,5 173,564-4,147-34,386-3,677-5,26-4,793-43,326-2,528-56,231-3, ,374-1,374-49,74-8, ,14-8,871-74,26 123,56 123,56 99,358 99,358 5,969-9,892 5 BREAKDOWN OF NET INVESTMENT INCOME INVESTMENT INCOME Income from investments in participating interests Interest income Returns on investments in real estate Dividend yields from Group companies Interest income from Group companies Other income from other than Group companies Returns on other investments Dividend yields Interest income from other than Group companies Other income from other than Group companies Total Value readjustments Capital gains Investment income, total INVESTMENT EXPENSES Expenses on real estate Expenses from other investments Interest expenses and other borrowing costs to other than Group companies Total Impairment and depreciation Impairment Planned depreciation on buildings Capital loss Investment expenses, total Net investment income before revaluations and value adjustments NET INVESTMENT INCOME IN THE PROFIT AND LOSS ACCOUNT Income and expenses from investments include Exchange rate differences in investments

24 24 / 53 NOTES 216 EUR 1, 215 Remaining acquisition cost Fair value Remaining acquisition cost Book value Book value Fair value 16,332 17,341 18,45 17,25 18,434 19,3 9,113 9,519 25,571 9,113 9,519 24, ,19 11,19 11,19 11,825 11,825 11,825 36,641 38,56 55,511 38,15 39,785 55, INVESTMENTS AT FAIR VALUE AND VALUATION DIFFERENCES REAL ESTATE INVESTMENTS Real estate Real estate shares in Group companies Other real estate shares Loans to Group companies OTHER INVESTMENTS Shares and participations 421, , , ,92 434,92 758,852 Debt securities 56,242 56, ,82 63,613 63, , , ,593 1,285,759 1,38,564 1,38,564 1,372,882 1,18,234 1,19,649 1,341,27 1,76,714 1,78,349 1,428,634 Other loan receivables The remaining acquisition cost of debt securities includes: the difference between the nominal value and acquisition cost, released (+) or charged () to interest income Book value includes: revaluations entered as income Valuation difference (difference between fair value and book value) 1,55 2,32 1,415 1, ,621 35,285

25 25 / 53 NOTES Equity Domicile Number Holding, % Book value EUR 1, Fair value EUR 1, 7 SHARES IN OTHER COMPANIES AND PARTICIPATIONS IN OTHER INVESTMENTS HELD BY THE COMPANY EQUITIES Number Holding, % Book value EUR 1, Fair value EUR 1, 3,.2 5, ,13. 28,92. 1, ,91.9 5,.1 2,294. 2,294. 2,.15 4, ,84. 1,477, , , Orkla ASA Norway 225,.2 1, , Outotec Oyj 55,.3 2, ,745.6 Roche Holding AG Switzerland 7,393. 1, ,61.28 Royal Dutch Shell PLC UK 72,348. 1,57.3 1, Equity Domicile Metso Corporation Nestle SA Switzerland Nokia Corporation Nokian Tyres Plc Oriola-KD Corporation ABB Ltd Switzerland 5, ,3.93 Alimak Group AB Sweden 5, Amer Sports Oyj - A 87,.73 8, ,993.6 Asiakastieto Group Plc 37, , , Sampo Plc 3,374, , ,76.37 Atea ASA Norway 264, , , Sandvik AB Sweden 11,.1 1, , Germany 23,725. 1, , BASF SE Germany Bayerische Motoren Werke AG Germany Borregaard ASA Norway British American Tobacco PLC UK CapMan Oyj - B 16,475. 1, , SAP AG 27,739. 2, , Schneider Electric SA France 29,443. 1, , , , Stora Enso Oyj - R 15,.2 1,4.67 1, ,539. 1,5.69 1, Swedish Match AB Sweden 6,.3 1, , ,138,2.79 1, , Syngenta AG Switzerland 3,65. 1, , Caverion Oyj 356, , , Tecnotree Corporation 5,5, Comptel Corporation 8,724, , ,678.2 Teleste Corporation 824, , ,36.32 Coor Service Management Holding AB Sweden 4,.42 1, ,125.1 Tikkurila Oyj 65, , ,226.5 Deutsche Post AG Germany 49,738. 1, , Tokmanni Group Oyj 65, 1.1 4,355. 5,525. DNA Oyj 25,.19 2,525. 2,537.5 Trelleborg AB Sweden 64,.3 1,7.75 1,21.28 DOF ASA Norway 5,, Unilever NV - CVA Netherlands 4,87. 1, , ,.11 5, ,77.6 F-Secure Corporation 1,836, , , UPM-Kymmene Corporation GlaxoSmithKline PLC UK 63,. 1, , Uponor Oyj 5, Hennes & Mauritz AB - B Sweden 5,. 1, , Vaisala Oyj - A 19, ,97.6 6, Hugo Boss AG Germany 8, Valmet Corporation 526, , ,36.33 JM AB Sweden 75,.1 1, ,66.47 Volvo AB - B Sweden 1,.1 1, , Kemira Oyj 226, , , Wärtsilä Corporation 123, , , Kone Oyj - B 29,.6 8, ,345.3 YIT Corporation 6,.47 4,51.4 4,554. Kuehne + Nagel International AG Switzerland 15, , ,934.8 Lassila & Tikanoja Plc 2,.52 3, , ,97 36,932 LVMH Moet Hennessy Louis Vuitton SA France 5, ,72.62 Total OTHER EQUITIES Equities, total 22,61 26,926 18, ,858

26 26 / 53 NOTES Fund share Domicile Book value EUR 1, Fair value EUR 1, FUND SHARES Private equity fund Domicile Book value EUR 1, Fair value EUR 1, PRIVATE EQUITY FUNDS Allianz RCM Europe Equity Growth W Luxembourg 7,928 14,761 Amanda III Eastern Private Equity L.P. 1,724 1,835 Comgest Growth Asia Ex Japan USD I Acc Class Ireland 3,61 7,89 Amanda IV West L.P. 4,24 4,832 DJ STOXX 6 OPT HEALTHCARE Ireland 1,978 4,159 Amanda V East L.P. 1,638 1,638 Fourton Odysseus 5,93 1,725 Apollo Offshore Energy Opportunity Fund Limited UK 3,897 4,73 FOURTON STAMINA NON-UCITS 6,173 8,5 Avenue Energy Opportunities Fund L.P. United States 8,565 9,692 INVESTEC GSF-ASIA PACIFIC-I UK 14,341 18,565 Broad Street Loan Partners 213 Europe L.P. UK 6,96 6,98 ishares Core S&P 5 ETF United States 26,555 45,135 Broad Street Real Estate Credit Partners II Treaty Fund, L.P. UK 3,565 3,996 ishares SMI ETF Switzerland 6,425 6,425 Capman Buyout VIII Fund A L.P. UK Capman Real Estate I Ky 7,696 7,696 EQT Credit (No.2) L.P. UK 8,958 11,82 EQT V (No.1) L.P. UK EQT VI (No.1) L.P. UK 4,639 6,159 LUX Mandatum Life European Small & Mid Cap Equity Fund SICAV-SIF C EUR Share Class Luxembourg 1, 1,228 LUX Mandatum Life Global Brands Equity Fund SICAV-SIF C EUR Share Class Luxembourg 9,972 9,972 LUX Mandatum Life Nordic High Yield Total Return Fund SICAV-SIF B EUR Share Class Luxembourg 18,66 18,66 Highbridge Liquid Loan Opportunities Fund, L.P UK 17,73 24,379 MFS European Value Fund Z Luxembourg 1, 21,962 M&G Debt Opportunities Fund II Ireland 8,623 9,687 MFS MER-EUROPE SM COS-I1EUR Luxembourg 4, 7,125 M&G Debt Opportunities Fund III Ireland 4,99 5,785 1,345 MB Equity Fund IV Ky 1,773 2,473 Nordic Mezzanine Fund II Limited Partnership UK ,651 The Forest Company Limited TOTAL UK 1, , ,821 OTHER FUND SHARES TOTAL FUND SHARES 125, ,269 Nordic Mezzanine Fund III Limited Partnership UK 2,16 Oaktree Real Estate Debt Fund (Cayman), L.P. UK 2,264 2,485 Saka Hallikiinteistöt Ky 12,852 12,899 Specialty Fund III UK 11,516 13,316 Vencap Syndication Trust Class Fund UK 739 3,48 115,26 137,357 TOTAL OTHER PRIVATE EQUITY FUNDS 63 1,473 PRIVATE EQUITY FUNDS, TOTAL 115, ,83 OTHER INVESTMENTS IN SHARES AND PARTICIPATIONS, TOTAL 421, ,958

27 27 / 53 NOTES 1 Jan31 Dec 216 EUR 1, 8 STATEMENT OF CHANGES IN EQUITY EUR 1, 216 Guarantee capital 1 Jan.31 Dec. 216 Initial fund 1 Jan.31 Dec. 216 Contingency fund 1 Jan. To interest on guarantee capital Transfer to profit/loss brought forward Contingency fund 31 Dec. At the disposal of the Board Reserves under the Articles of Association 1 Jan. At the disposal of the Board, 31 Dec. Profit brought forward 1 Jan. To interest on guarantee capital Contingency fund Profit brought forward 31 Dec. 8, , , ,678 Cash 1 1 The cash assets, EUR 6.8 million (11.4), provided as security in the transfer according to the Act on Financial Collateral Arrangements, are included in the balance sheet item Other liabilities. The cash assets, EUR. million (.), received as security in the transfer according to the Act on Financial Collateral Arrangements, are included in the balance sheet item Other receivables , ,76 INVESTMENT COMMITMENTS Profit/Loss for the financial year TOTAL 11, ,743 DISTRIBUTABLE PROFIT Profit for the financial year Contingency fund At the disposal of the Board 11, , TOTAL DISTRIBUTABLE PROFITS 255,166 Number BREAKDOWN OF GUARANTEE CAPITAL Number of shares (number, three votes/5, shares) 5, 5, Nominal value/share (EUR) The company s Board of Directors is not authorised to raise the guarantee capital, grant option rights or buy convertible bonds. EUR 1, LIABILITIES LEASING AND RENT LIABILITIES Amount payable in ASSETS PLEDGED AS SECURITY FOR DERIVATIVES, BOOK VALUE Private equity funds 6,8 11,4 87,158 59, ,729 1, ,39 1,338 AMOUNT OF JOINT LIABILITY ASSOCIATED WITH GROUP REGISTRATION FOR VALUE ADDED TAX Kaleva Mutual Insurance Company belongs to If P&C Insurance Company s value added tax group. Group members are jointly liable for the value-added tax payable by the group. Group companies Co-operation companies VAT group total DERIVATIVES Non-hedging Interest rate derivatives Interest rate swaps, non-hedging Currency derivatives Forward contracts, open Forward contracts, closed Option contracts Written 216 Fair Underlying value* asset 215 Fair Underlying value* asset 8,749 15, 13,22 649,99 1, ,766 23,558 3, ,147 33,69 12,5 3 2,717 1, ,824 16,99 1,42,33 * The fair values of option contracts include both premiums received and paid. Negative valuation differences in non-hedging derivative contracts are entered as a cost (fair value = ). Positive valuation differences in hedging derivative contracts are entered as income to the extent where the hedged contract is entered as a cost (fair value = ). The company has no other contingent liabilities as referred to in Chapter 1, Section 8, subsection 3 of the Insurance Companies Act.

28 28 / 53 EUR 1, , %.8% 5.9% 1.7% 11 63, %.8% 9.3% 1.6% 1 61, %.9% 5.5% 6.9% 11 16,49 6, %.9% 9.4% 1.% 1 15,64 57, %.9% 9.9% 12.7% 16 13,746 64, ,56-8,26-63,148-7,562 37,268 37,268-25,818 11, ,345 63,451 99,358-25, ,671-8,368 18,185 18,185 16,49-99,668 24, ,546 61,298 44, ,558 78,549-9,287 42, , ,687 4, ,335 59,98 82,49-89,37 26,659-8,252 71,76 71,76-1, ,59-41, ,623 57,43 88,192-77,275 27,829-7,617 88,532 88, ,874 65, ,465 37,268-35,277 1,991 18,185 32,136 14,321 43,74 38,836 81,91 71,76 51,14 122,864 88,532 49, , KEY FIGURES OTHER KEY FIGURES Premiums written Expense ratio as a percentage of expense loading Expense ratio as a percentage of the balance sheet total Net investment income on capital employed Return on assets at fair value, % Average number of personnel during the financial year Equalisation provision in the currency of the financial statements Performance analysis for insurance company Premiums written Investment income and charges, revaluations and revaluation adjustments and changes in value Claims paid Change in technical provisions before bonuses (customer bonuses) and change in equalisation provision Operating expenses Balance on technical account before bonuses (customer bonuses) and change in equalisation provision Other income and expenses Operating profit/loss Change in equalisation provision Bonuses (customer benefits) Profit/loss before appropriations and taxes Appropriations Income tax and other direct taxes Profit/loss for the financial year TOTAL RESULT Operating profit/loss, i.e. profit or loss before the change in equalisation provision, bonuses (customer benefits), extraordinary items, appropriations and taxes +/- Change in off-balance-sheet valuation differences, and in the fair value reserve and revaluation reserve Total result

29 29 / 53 INVESTMENT ALLOCATION AT FAIR VALUES Basic distribution Fixed-income investments, total Loan receivables Bonds Other debt securities and deposits Equity investments, total Listed equities Private equity investments Unlisted equities Real estate investments, total Direct real estate investments Real estate funds and co-investments Other investments Other investments Investments, total Effect of derivatives Total investments at fair value Modified duration of the bond portfolio , , , ,66 5,675 25,437 51,494 77,45 56,45 2,595 56,448 56,448 1,561, %.% 38.1% 16.3% 37.% 32.1% 1.6% 3.3% 4.9% 3.6% 1.3% 3.6% 3.6% 1.% , ,76 89,43 656, ,627 38,866 79,25 82,539 57,1 25,439 37,474 37,474 1,497,688 Risk breakdown 48.2%.% 42.2% 6.% 43.8% 36.% 2.6% 5.3% 5.5% 3.8% 1.7% 2.5% 2.5% 1.% , ,78 16, ,66 5,675 25,437 51,494 77,45 56,45 2,595 56,448 56,448 1,561, %.% 44.2% 1.3% 37.% 32.1% 1.6% 3.3% 4.9% 3.6% 1.3% 3.6% 3.6% 1.% 1,561,27 1.% , ,279,86-558, , ,232 38,866 79,25 82,539 57,1 25,439 37,474 37,474 1,497, ,497, %.% 85.5% -37.3% 43.8% 35.9% 2.6% 5.3% 5.5% 3.8% 1.7% 2.5% 2.5% 1.%.% 1.%

30 3 / 53 NET INVESTMENT INCOME ON CAPITAL EMPLOYED Return EUR /% on capital employed Fixed-income investments, total Loan receivables Bonds Other debt securities and deposits Equity investments, total Listed equities Private equity investments Unlisted equities Real estate investments, total Direct real estate investments Real estate funds and co-investments Other investments Other investments Investments, total Unallocated income, charges and operating expenses Net investment income at fair value Net return on investments at fair values , , ,1 43,4 2,694-1,993 4,71 3, ,256 7,256 91,96-2,42 89,864 Capital employed Return on capital employed, % , , ,75 611, ,472 26,367 49,51 77,82 43,579 24,693 54,35 54,35 1,53,694 5.% -1.% 6.1%.1% 7.4% 8.5% 11.1% -4.6% 4.% 4.3% 3.2% 13.3% 13.3% 6.1% 2.9% 4.3% 3.4% 1.8% 16.8% 16.1% 14.2% 23.1% 14.7% 7.6% 3.2% 15.4% 15.4% 9.6% 4.3% 6.6% 5.4%.5% 8.% 7.% 18.3% 11.% -.9% 4.5% -27.2% 11.3% 11.3% 5.7% 1.7% 5.7% 2.4%.2% 25.2% 1.2% 9.% 52.2% 6.% 5.5% 7.% 17.2% 17.2% 9.6% 1.% 5.9% 9.3% 5.5% 9.4% 9.9% 5.5% 9.3% 1.4% 15.% 6.5% 9.5%

31 31 / 53 CALCULATION METHODS FOR THE KEY FIGURES PREMIUMS WRITTEN Before reinsurers share EXPENSE RATIO AS A PERCENTAGE OF EXPENSE LOADING (operating expenses + claims settlement expenses)/expense loading EXPENSE RATIO AS A PERCENTAGE OF THE BALANCE SHEET TOTAL (operating expenses + claims settlement expenses)/opening balance sheet total NET INVESTMENT INCOME ON CAPITAL EMPLOYED The return on investments at fair value in relation to capital employed is calculated using the modified Dietz formula, whereby the capital employed is calculated by taking the fair value at the start of the period and adding to it each period s cash flows, weighted by the relative time remaining from the transaction date or middle of the transaction month to the end of the period. RETURN ON ASSETS AT FAIR VALUE, % (Operating profit + interest and expenses on liabilities + technical rate of interest + revaluations/ reversals entered in the revaluation reserve + change in valuation differences on investments) (balance sheet total + valuation gains/losses) (in which the denominator is the average at the beginning and end of the year)

32 32 / 53 AUDITORS REPORT To Kaleva Mutual Insurance Company s Annual General Meeting Financial statements audit Opinion We have audited the financial statements of Kaleva Mutual Insurance Company (Business ID ) for the financial year 1 January31 December 216. The financial statements comprise the balance sheet, the profit and loss account, cash flow statement and notes. In our opinion, the financial statements give a true and fair view of the company s financial performance and financial position in accordance with the laws and regulations governing the preparation of financial statements in and comply with statutory requirements. Basis for opinion We performed this audit in accordance with good auditing practice in. Our responsibil- ities under good auditing practice are further described in the Auditor s responsibilities for the audit of the financial statements section. We are independent of the company in accordance with the ethical requirements that are applicable in and which are relevant to our audit, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Obligations of the Board of Directors and the CEO regarding the financial statements The Board of Directors and the CEO are responsible for the preparation of the financial statements that give a true and fair view in accordance with the laws and regulations governing the preparation of financial statements in and comply with statutory requirements. The Board of Directors and the CEO are also responsible for elements of internal control which they deem necessary for preparing financial statements that are free from material misstatements, whether due to fraud or error. In preparing the financial statements, the Board of Directors and the CEO are responsible for assessing the company s ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting. The financial statements are prepared using the going concern basis of accounting unless there is an intention to liquidate the parent company or the group or cease operations, or there is no realistic alternative but to do so. Auditor s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatements, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but it is not a guarantee that an audit conducted in accordance with good auditing practice will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. As part of an audit in accordance with good auditing practice, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error; plan and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional

33 33 / 53 AUDITORS REPORT omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to plan audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the company s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of the Board of Directors and the CEO s use of the going concern basis of accounting and, based on the audit evidence we have obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the company s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw our attention in our auditor s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor s report. However, future events or conditions may cause the company to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial statements, in- cluding the disclosures, and whether the financial statements represent the underlying transactions and events so that the financial statements give a true and fair view. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Other reporting requirements Other information The Board of Directors and the CEO are responsible for other information. Other information comprises information included in the Report of the Board of Directors. Our opinion on the financial statements does not cover other information. In connection with the audit of the financial statements, our responsibility is to read the information included in the Report of the Board of Directors and, in doing so, consider whether the information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. Our responsibility also includes considering whether the Report of the Board of Directors has been prepared in accordance with the applicable laws and regulations. In our opinion, the information in the Report of the Board of Directors is consistent with the information in the financial statements, and the Report of the Board of Directors has been prepared in accordance with the applicable laws and regulations. If, based on the work we have performed on the Report of the Board of Directors, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. In Helsinki on 27th February 217 Ernst & Young Oy Auditing firm Tomi Englund Authorised public accountant

34 34 / 53 RISK MANAGEMENT NOTES 1. K aleva s risk management principles 31 December Risk management responsibilities and control Risks are an essential and inherent part of Kaleva s operating environment and business. The objective of risk management is to identify the various risks that the business is exposed to as successfully as possible. The risk management process also aims to ensure that various risks can be assessed, limited and controlled. The goal is to limit the risks to a level approved by Kaleva s Board of Directors, on behalf of all of the company s functions. Kaleva s Board of Directors is responsible for the adequacy of the company s risk management and internal control. The Board annually approves the risk management plan, the reinsurance plan, the investment plan and other guidance on the organisation of risk management and internal control in the company s various business functions. The Board of Directors also annually approves the internal auditing plan; the auditing activities focus especially on operational risks and target selected product areas and processes. Quantitative limits have been set for risks. Compliance with the control limits and procedures for risk management are monitored continuously. If the limits are exceeded or any deviations from the risk management procedures occur, these must be assessed and reported without delay. Kaleva s CEO holds overall responsibility for implementing risk management in accordance with the Board of Directors guidelines. This also applies to the company s outsourced functions. The business areas are responsible for the identification, assessment, monitoring and management of their operational risks. Kaleva is a co-operation partner of the Sampo Group and works in close co-operation with Sampo Plc and Sampo s subsidiary, Mandatum Life Insurance Company Ltd. (Mandatum Life), and If P&C Insurance Company (If). For that reason, Kaleva applies, where applicable, the Sampo Group s risk management principles, which also take into account the special characteristics of the insurance business. Each employee bears responsibility for risk-management matters risk management, internal auditing, the compliance function and the actuarial function must be informed of matters that are important in terms of managing their tasks. 1.1 General principles of risk management 1.3. Classification of risks Kaleva s risks consist of market risks, credit risks, underwriting risks, operational risks, legal and compliance risks, reputation and business risks, and regulatory risks. Market and credit risks and solvency are monitored by Kaleva s Investment Committee. Other risks are monitored by Kaleva s Risk Management Committee. In addition, the company s chief actuary takes part in Mandatum Life s Insurance Risks Committee and Operational Risk Committee Risk management documentation Documentation related to risk management complies with the regulations of the Insurance Companies Act and EIOPA. The documentation does not focus solely on the company s risk management plan: official risk management requirements (e.g. on capital management, risk management principles, insurance risks, reinsurance risks, asset and liability management, liquidity risks, investment risks, etc.) are documented in, among other things, the general description of corporate governance, the internal control policy, the investment plan, the chief actuary s report for the investment plan, the reinsurance plan, the ORSA assessment, the underwriting policy, the reporting and disclosure policy, the liquidity management principles and the product development policy. 2. Market risks Market risks refer to losses or a weakening financial position leading to direct or indirect changes in the market values of assets and liabilities. Kaleva s long-term investment objective is to achieve an adequate result at an acceptable level of risk in order to cover the minimum return, i.e. the technical rate of interest, on guaranteed-return policies. In addition, whenever possible, the company strives to give its customers reasonable supplementary returns. Market risks are managed by diversifying investments by instruments, sectors and across different markets. No limits have been set on the duration risk between the technical provisions and fixed income investments. Fixed income investments are primarily made according to the interest rate outlook. The currency distribution of investments and technical provisions is monitored and managed continuously. Kaleva s Board of Directors annually confirms an investment plan, which lays down the target distribution for the investment portfolio, the variation range by instrument, the organisation of the investment function, and decision-making and authorisation power. The investment plan also includes guidelines on the

35 35 / 53 RISK MANAGEMENT NOTES use of derivatives. The Investment Committee appointed by the Board oversees compliance with the principles laid down in the investment plan and reports on the investment operations to the Board of Directors. Kaleva s market risks mainly involve equity investments and the interest rate risk related to fixed-income investments and to the technical provisions of guaranteed-return policies. The most significant interest rate risk for life insurance operations is that a guaranteed long-term minimum return on the corresponding technical provisions cannot be achieved through fixed income investments. Efforts are made to reduce market risks also through significant buffer items included in technical provisions. Roughly EUR 35 million in a provision for bonuses can be used not only for paying bonuses, but also to cover the losses caused by calculation bases. Kaleva increased its technical provisions at the end of 216, such that in the financial statements, a discount rate of.5% is calculated on the technical provisions for savings insurance policies for the years This increased the technical provisions by some EUR 92 million. Taking solvency capital into consideration, Kaleva has, among other things, a total buffer of altogether some EUR 9 million for managing market risks; this amount represents close to 6% of the market value of investments. 2.1 Market risk of assets The market risk of assets is monitored using various sensitivity analyses. Calculation of the long-term value-change risk employs fixed dispersion figures by asset class that are confirmed annually by the company s Board of Directors. When calculating the overall asset risk, it is assumed that all submarkets decline simultaneously by their volatilities, and the exchange rate risk is included as its own risk class. The company s own funds (Solvency II solvency capital) must exceed the company s solvency requirement (Solvency II SCR) even after a total risk has been realised. At the close of 216, the total risk was some EUR 238 million, and Kaleva would have had sufficient solvency even after this kind of shock. A sensitivity analysis of the fair value of the assets in various market risk scenarios is presented in the table below. The effects describe the impact of a sudden change taking place within a specified market variable on the fair value of the financial instruments on 31 December Management of the balance sheet market risk The solvency requirements for insurance companies, based on legislation and other regulations, also define the framework conditions for Kaleva s investment operations. Managing the balance sheet market risk is a central aspect of the company s solvency management. 31 Dec. 216 Interest Equity Other investments 2% down 2% down 1% level movement downwards 1% level movement upwards MEUR The new Solvency II framework entered into force on 1 January 216 and also takes balance sheet market risks into account. According to Solvency II, technical provisions are calculated according to market-consistent values: as a sum of the provision for guaranteed benefits, the provision for bonuses, and the risk margin. Changes in market interest rates affect the amount of the provision for guaranteed benefits, as the expected future cash flows of guaranteed benefits are discounted to the present using the volatility-adjusted interest rate curve, that is set by the supervisory authority. Kaleva s terminal bonus system serves as a buffer for changes in investment assets, which means the amount of the provision for guaranteed benefits affects the amount of the provision for bonuses the expected market-con- sistent capital value of bonuses to be granted in the future. The risk margin is calculated by estimating first the SCR for future years, then by calculating a 6% cost of capital on it, and discounting it to the present using the interest rate curve, unadjusted for volatility, set by the supervisory authority. Kaleva applies the standard model in its Solvency II calculations, in which the amount of own funds is stressed through the application of various shocks prescribed by authorities (equity, interest rate, and longevity shocks, etc.). The objective is to set a level for the Solvency II solvency requirement at which, when the own funds are equal to the solvency requirement, the own funds would be sufficient to cover the insured benefits

36 36 / 53 RISK MANAGEMENT NOTES with a likelihood of 99.5% over a one-year period. Kaleva s Board of Directors regularly receives information about the company s Solvency II position, the solvency position is reported to the Board quarterly, and the Board decides on any investment allocation measures. There is a sufficiently high probability that the company has enough time to reconcile its risks before its own funds under Solvency II would fall short of Solvency II s SCR. On 31 Dec. 216, Kaleva adopted a new internal risk management model, a so-called interest-rate-risk-bearing-capacity calculation. Interest-rate risk-bearing capacity is intended to ensure the sufficiency of assets covering savings insurance policies in relation to an estimate of market-consistent technical provisions calculated at market interest rates. Monitoring limits have been set on the risk-bearing capacity, and if the capacity falls below the limits, the Board of Directors in notified. The Board shall also decide on any Exchange rate risk, net position, EUR million measures to be taken in such an event, if necessary. The interest-rate-risk-bearing-capacity calculation is described in greater detail in the company s investment policy. Kaleva s Board of Directors regularly receives information about the company s interest-rate risk-bearing capacity. At the end of 216, Kaleva s risk-bearing capacity exceeded the upper monitoring limit. The company s Chief Actuary oversees reporting on both the solvency position and interest-rate risk-bearing capacity. The Solvency II solvency position is discussed in greater detail in the Report of the Board of Directors. 2.3 Assets covering the technical provisions The fair value of Kaleva s investment assets at the end of 216 was EUR 1,341 million. The return on investments in 216 was 5.9 per cent at fair value. The average return on capital employed was also 5.9 per cent. The duration of Kaleva s fixed income portfolio was 1.6 years. ers, derivative counterparties or other debtors. Credit risks arise from both investments and insurance and reinsurance contracts. 2.4 Exchange rate risks Credit risks can be realised as a drop in market value as credit margins develop unfavourably (spread risk) or as defaults if the issuer of a debt instrument or the counterparty of a derivative contract or reinsurance contract is not able to fulfill their financial obligations (default risk). The with-profit technical provisions arising from Kaleva s direct insurance business consist entirely of euro-denominated commitments. For that reason, the company is exposed to exchange rate risks when investing outside the euro zone. Kaleva s currency strategy is based on active control of the currency position, with the goal of achieving a return that is within the limits of the investment plan in relation to a situation where the exchange rate risk is fully hedged. The table below presents the open currency position of Kaleva s technical provisions and investments (in EUR million) per 31 Dec Credit risks Credit risks are related to possible losses or a weakening financial position caused by changes in the creditworthiness of securities issu- The default risk related to bonds has decreased from the previous year. The chart shows the distribution of Kaleva s fixed income investments according to credit rating. The goal is to limit and control credit risks through detailed issuer and counterparty limits. Default risks related to derivatives are limited by concluding transactions only with counterparties that have been evaluated in stock exchanges (or by other regulated market places) or which have been deemed creditworthy USD SEK NOK GBP CHF DKK JPY Other Investments Derivatives Technical provisions Net position, total

37 37 / 53 RISK MANAGEMENT NOTES THE CHARTS BELOW PRESENT THE ALLOCATION OF KALEVA S INVESTMENT PORTFOLIO FROM VARIOUS PERSPECTIVES. Allocation of investment portfolio , MEUR 1,341 oney Market Securities and Cash M 16% Government Bonds.3% Credit Bonds, Funds and Loans 37% Trading Derivatives 1% Equity 35% Real Estate 5% Private Equity 2% Alternative 4% Allocation of investment portfolio , MEUR 1,429 Money Market Securities and Cash Credit Bonds, Funds and Loans Trading Derivatives Equity Real Estate Private Equity Risk Funds Allocation of fixed income investments , MEUR 85 6% 41% 1% 41% 6% 2% 3% Money Market Securities and Cash 3% Government Bonds 1% Credit Bonds, Funds and Loans 68% Trading Derivatives 1% Allocation of equity investments , MEUR 553 * 57% Scandinavia 4% Europe 19% North America 15% Eastern Europe % East Asia 5%

38 38 / 53 RISK MANAGEMENT NOTES (OTC derivatives). Default risks are controlled through derivative trade framework agreements (ISDA agreements) entered into with counterparties and through possible collateral arrangements (CSA documents) linked to them. Maximum limits have been set for derivative trade counterparty banks based on their credit rating. A requirement to specify interest rate swaps through central counterparty enterprises, which further reduces the counterparty risk, entered into effect in 216. Kaleva s default risk related to reinsurance is low, as the company uses reinsurance to a limited extent. 4. Insurance risks 4.1 Premium pricing and underwriting Of the insurance risks belonging to life insurance, the most significant are those related to mortality, disability and morbidity. At Kaleva, these risks are traditionally limited through insurance terms and conditions, prudent underwriting, risk and cost equivalent premium rating, reinsurance and by limiting the sums insured. In the underwriting for individual risk insurance policies, the guidelines drawn up and maintained by the reinsurer are primarily used. In setting the price of insurance premiums, the starting point is, above all, the sustainability of the premiums. Rating has been based both on the mortality and disability functions generally used in the sector and on the company s own rather comprehensive statistics. The fairness of premium pricing has been monitored using annual risk assumption analyses. The ratio of actual claims expenditure to collected risk income in 216 was roughly 79 per cent. Bonuses paid on death benefits increase the claims incurred, and discounts lower the risk income. The premium rating of products for sale and the contents of insurance terms and conditions have also been assessed on the basis of the analyses. In disability and medical expenses insurance, the company also has the possibility to raise the premiums of existing policies as the claims ratio falls. Particularly in medical expenses insurance, claims expenditure has exceeded inflation as measured by the cost-of-living index and led to a need for additional increases in insurance premiums. In 217, a deductible-linked increase in the price of medical expenses insurance was made. The only insurance product sold by Kaleva is Primus, a group life and accident insurance intended for the members of trade unions and employee organisations. The product s pricing is based on an organisation-specific discount that can be adjusted both ways in accordance with the loss development of each organisation. Since gender can no longer be used to set premium rates, organisation membership and the approximate professional group it Fixed income investments by credit rating AAA 2% AA+ - A- 57% BBB+ BBB- 13% BB+ - B- 1% CCC+ - D 1% NR 17% Fixed income investments by sector Governments 1% Banks 61% Companies 39%

39 39 / 53 RISK MANAGEMENT NOTES Investments by asset class, sector and credit rating 31 Dec. 215 AAA AA+ AA- A+ A- BBB+ BBB- BB+ C D Unclassified Fixed income investments, total Equities Other Counterparty risk TOTAL Securitised bonds Basic industry Capital commodities Consumables Secured bonds Energy Financing Governments Bonds guaranteed by governments Health care Insurance Media Packaging Public sector, others Real estate Services Technology and electronics Telecommunications Traffic Community services Other Investment funds ,555 TOTAL

40 4 / 53 RISK MANAGEMENT NOTES points to will become increasingly important factors in determining prices. Switching to organisation-specific pricing will require a sufficient amount of historical data measured in terms of insured years. A general increase in life expectancy is a clear trend in the Western world. The risk this causes in Kaleva s insurance portfolio is minimal, as Kaleva does not offer pension insurance. Kaleva s insurance portfolio is relatively well-diversified and does not contain significant risk concentrations. Following a decision by the European Court of Justice on 1 March 211, gender-based factors can no longer be considered in premium pricing; this decision has an impact on the pricing of Kaleva s products. The possibility to use gender-based statistics to determine insurance premiums and benefits, per a 24 EU gender equality directive, ended on 21 December 212. The decision had significant repercussions, as gender has been an essential factor in insurance premium pricing and benefits throughout the sector and for Kaleva. In practice, gender-neutral pricing breaks the traditional correlation that exists between insurance premiums and risks. Gender-neutral premiums and benefits will also have to be adjusted in the majority of old insurance contracts covering private persons. The only exception is the existing death cover policies, where raising insurance premiums without a substantial increase in the underlying mortality is not possible under the current legislation. 4.2 Catastrophes and pandemics Reinsurance policies serve to limit especially single mortality and permanent disability risks. The company s Board of Directors annually decides on the maximum risk level on its account. In the case of a single sum payable on death and a single risk sum payable in the event of disability, portions exceeding the limit of EUR 1.5 million are reinsured. Because of the company s strong solvency, Kaleva does not have separate catastrophe protection in the event of a major catastrophe, other than its employees group life insurance pool. With a substantial rise in mortality, the company would have the opportunity to lower the bonuses paid in addition to the sums payable on death according to the insurance contract or discontinue them altogether. Catastrophes do not pose a threat to Kaleva s solvency. Following the tsunami in the Indian Ocean in 24 which claimed the lives of 179 Finns, the resulting claims expenses for Kaleva amounted to only EUR.6 million. In The greatest risks in Kaleva s life insurance savings policies are, considering the underlying interest rate level, a high fixed technical rate of interest and, for many insurance policies, the right to pay additional premiums. 1994, the cruise ferry MS Estonia sank in the Baltic Sea, taking the lives of 852 people. Following the accident, a scenario to determine the impact of the drowning of 1, Finns on Kaleva s claims expenditure was simulated. Such an incident would increase, with more than a 99 per cent probability, Kaleva s claims expenditure by less than EUR 5 million. Reinsurance cover in the event of a pandemic is not available on reasonable terms. There are also no reliable mortality forecasts in the event of a pandemic. The impacts of a pandemic within Kaleva s insurance portfolio can be illustrated using the same assumptions that the Ministry of Social Affairs and Health used in its 26 publication of a national preparedness plan for an influenza pandemic. Without vaccinations, the scenario used in the calculation, which concerned tar- geted vaccinations, would mean an increase in mortality of.2 percentage points among Kaleva s group of insured persons. This would increase claims expenditure by roughly EUR 16 million. Besides illness and increased deaths, a serious pandemic is also highly likely to have other financial repercussions.it can be assumed that, simultaneously on the investment markets, the value of practically all risky asset classes would decline globally, which would lower solvency capital. 4.3 I nterest rate risk related to technical provisions The greatest risks in Kaleva s life insurance savings policies are, considering the underlying interest rate level, a high fixed technical rate of interest and, for many insurance policies, the right to pay additional premiums. The

41 41 / 53 RISK MANAGEMENT NOTES latter risk was mitigated considerably when, in 24, the limits on premiums towards Optimi insurance took effect. After the limit was introduced, the theoretical maximum amount of future additional premiums is in the region of EUR 5 million. If necessary, the insurance terms and conditions allow for new limits to Optimi additional premiums, and such limits will enter into effect in 217. All of the savings policies included in Kaleva s technical provisions are guaranteed-return policies with a technical rate of interest of 4.5 per cent. Of the total of EUR 459 million in insurance savings, some EUR 12 million is due to mature in 217. For the expiring savings insurance policies, only the risk cover component linked to them can be continued. The technical provisions in the financial statements are discounted with a.5 per cent interest rate for and 4.5 per cent technical rate of interest for other years (more in section 2). A high technical rate of interest will burden the company in future. The savings insurances guaranteed technical provisions discounted with the interest rate curve based on the swap rate in the investment markets was, on 31 December 216, approximately EUR 3 million higher than the 4.5 per cent discounted technical provisions in the financial statements. According to the calculation, the duration of the savings insurances guaranteed technical provisions discounted with the risk-free interest rate was 16 years Expense risk Insurance operations also involve an expense risk, meaning the cost items (loading income) collected on insurance policies are not sufficient to cover the necessary operating expenses, either in the short or long term. The expense risk in Kaleva s insurance operations is well under control, as the so-called expense ratio (operating expenses in relation to expense loading) is stabilised at the 67 per cent level. Cost pressures also have not been postponed by spreading the acquisition costs of insurance policies or zillmerising the technical provisions. 4.5 Other insurance risks Customers have the right to interrupt the payment of their insurance premiums (lapse risk) or they may terminate their insurance contract early (surrender risk). Some of the company s insurance policies are premium-free, so in the event of surrender, the customer loses these future rights. The surrender risk is also reduced by the fact that the bonus the customer receives when the insurance ends (the terminal bonus) is calculated, in the event of surrender, at a lower rate than if the insurance had ended when the savings amount was paid out. 5. Operational risks Operational risks refer to the risk of a loss caused by insufficient or non-functioning internal processes, systems, people or outside events. Risks are divided into at least the fol- lowing classes: internal malpractices, outside malpractices, HR deficiencies, deficiencies in operating practices vis-à-vis customers, products or engaging in business, damage to physical property, interruption of operations and system failures, deficiencies in operating processes and changes in the outside operating environment. The operational risk is realised, for example, as costs, claims, loss of reputation, erroneous position, risk and results data or interruption of operations. Operational risk management enhances the effectiveness and productivity of the entire company s internal process management and reduces profit fluctuations. Coordinated management of operational risks gives the company s management an overall picture of how risks are managed and realised, and, through analyses of risk indicators and the outside operating environment, of changes in risk position. Kaleva s Risk Management Committee convenes at least four times a year. Its task is to, among other things, co-ordinate operational risk management, monitor operational risks identified using self-assessment methods, go over realised operational risks and provide guidance and recommendations. The Risk Management Committe is also in charge of continuity and preparedness plans. The internal audit focuses particularly on operational risks and managing these by carry- ing out annual detailed analyses on processes and elements thereof agreed on in advance. The audits also involve Kaleva s outsourced services. The audit reports, which are also processed by the company s Board of Directors, present observed deficiencies and necessary improvement proposals. Kaleva s continuity plan is tested and updated regularly. The latest update was carried out in January 217. The outsourced operations (Mandatum, If and Sampo) draw up their own continuity plans, which take Kaleva s business into account. The company s Board of Directors annually approves a risk management plan that covers all of the company s risks; the scope of the plan is established in the regulations of the Financial Supervisory Authority.The risk management plan currently in effect was approved by Kaleva s Board in February Legal and compliance risks Legal and compliance risks refer to the risk of the company not complying with some aspects of the legislation in effect, with regulatory requirements, with insurance terms and conditions or with the company s internal guidelines. Deficiencies and errors in insurance terms and conditions and other customer documents are considered a part of operational risks.

42 42 / 53 RISK MANAGEMENT NOTES The CEO, together with the company s chief legal officer and Mandatum Life s legal affairs unit, oversees compliance with the above-mentioned regulations and guidelines at Kaleva. The legal affairs unit monitors the regulations, guidelines and recommendations of the law and the authorities. The chief legal officer ensures that the company s internal guidelines are updated pursuant to official decisions, etc. 7. Business and reputation risks Reputation risks arise when an error, deficiency or misleading data in customer information or other public information or the company s operations harm or could cause considerable harm to customers and co-operation partners trust in the company. Many of the single risk factors affecting the occurrence of reputation risks are part of operational risks. Business risks refer to risks related to Kaleva s operating environment which could, if realised, compromise or prevent the company s chosen strategy from being realised or weaken the company s profitability and solvency. Unexpected changes in the operating environment could be related to general economic development, the institutional environment (legislation, etc.), technological innovations and changes in the competitive landscape. The management of business and reputation risks is the responsibility of, above all, the CEO. 8. Regulatory risks The insurance sector has faced considerable new regulations in recent years, and it will continue to do so in the near future. If these new regulations are not implemented correctly, the company could be exposed to compliance risks (section 6). It is also p ossible that the company s operating environment changes to such an extent that the company operates at a loss (section 7). The increase in regulation will increase the company s operating expenses. Although the Solvency II regulations highlight risk management and its importance to the company s operations, it also entails considerable costs and administrative work (e.g. more than 6 new reports). Kaleva s collaboration with Mandatum Life on Solvency II matters will minimise both these costs and administrative work. 9. ORSA Kaleva carried out the Own Risk and Solvency Assessment (ORSA) on its situation on 3 September 216, in compliance with the requirements laid down in the Insurance Companies Act. According to the assessment, the company s chosen business strategy does not involve risks that would threaten the company s solvency. 1. Risk management outlook Solvency II entered into force on 1 January 216. Kaleva issued an estimate of its Solvency II solvency position on 3 September 215 on its website, as well as a preliminary estimate of its solvency position on 31 December 216 in its 216 Report of the Board of Directors; the company s solvency position will remain strong also within the new framework. Solvency II s requirements for extremely detailed reporting will still entail a lot of work during 217. Risk management and risk management methods are continuously developed within the company. The exceptionally low interest rate level continues to present a major challenge to investment operations.interest rates in the euro zone are expected to remain at a low level for a long time. Kaleva s fixed income portfolio contains a very high number of corporate bonds, the assets of which, once matured, will be very challenging to reinvest.

43 43 / 53 CORPORATE GOVERNANCE

44 44 / 53 SUPERVISORY BOARD Chairman Antti Palola Chairman Finnish Confederation of Salaried Employees (STTK) Deputy Chairman Pekka Piispanen Director Akava ry Other members Eila Annala CEO PlusTerveys Oy Matti Apunen Director Finnish Business and Policy Forum EVA Matti Bergendahl CEO Realia Group Oy Aija Bärlund MBA Oy Aija Bärlund Ab Tommi Grönholm Director, Organisational Affairs Union of Professional Engineers (IL) Hanna-Leena Hemming Executive Director Suomen Ekonomit Johanna Ikäheimo Chairman of the Board Lappset Group Oy Hannu-Matti Järvinen President of the Council Academic Engineers and Architects in (TEK) Timo Korpijärvi Financial Manager Finnish Metalworkers Union Teemu Lehtinen CEO Taxpayers Association of Lauri Lyly Chairman Central Organisation of Finnish Trade Unions (SAK) Jukka Mattila Director of Economy Service Union United (PAM) Merja Merasto Tarja Munukka Director Trade Union Pro Heidi Nieminen Chairman Finnish Post and Logistics Union (PAU) Pasi Pentikäinen CEO Pentik Oy Pasi Pesonen Director Trade Union of Education (OAJ) Maija Pihlajamäki President The Federation of Public and Private Sector Employees (Jyty) Ismo Riitala CEO K-Plus Oy Erkki Solja CEO Kiilto Oy Jore Tilander Executive Director Association of Finnish Lawyers Petri Vanhala President Finnish Paperworkers Union Mikko Wikstedt Bachelor of Science (B.Sc.)

45 45 / 53 STATEMENT OF THE SUPERVISORY BOARD Kaleva Mutual Insurance Company s Report of the Board of Directors, financial statements, and Auditors Report for 216 have been presented to the Supervisory Board. The Supervisory Board, which had no comments concerning the presented documents, submits the Report of the Board of Directors, the financial statements and the Auditors Report to the Annual General Meeting and proposes that the Report of the Board of Directors and the financial statements be approved and that the Board s proposal on the disposal of profit be approved. Helsinki, 7 March 217 On behalf of the Supervisory Board Antti Palola President AUDITORS Regular auditor Ernst & Young Oy Auditing firm Tomi Englund Authorised public accountant

46 46 / 53 BOARD OF DIRECTORS Deputy Chairman Chairman Timo Vuorinen, 52 Ville-Veikko Laukkanen, 46 Petri Niemisvirta, 47 Pekka Pajamo, 54 Eero O. Kasanen, 64 CEO If P&C Insurance Company Ltd Senior Vice-President Varma Mutual Pension Insurance Company CEO Mandatum Life Insurance Company Ltd. Senior Vice-President Varma Mutual Pension Insurance Company Professor

47 47 / 53 KALEVA S ELECTED REPRESENTATIVES (YEAR IN WHICH TERM EXPIRES IN PARENTHESES) Esko Ahonen (217) Municipal Manager Evijärvi Kati Kiljunen (221) Executive Director Pori Sallamaari Muhonen (221) Communications consultant Helsinki Janne Seurujärvi (217) Director, Business Development Ivalo Eero Broman (221) CEO Joensuu Johanna Koivuniemi (217) Head nurse Kauhajoki Petteri Nokkala (221) CEO Muurame Pirjo Sirviö (217) Clinical Study Coordinator Oulu Outi Ervasti (221) Deputy Director, lecturer Oulu Anne Kolehmainen(217) Headmaster Jyväskylä Birgit Palm (217) Teacher Kuopio Marja Suni (217) M.Sc. (Econ.) Lappeenranta Sari Essayah (221) Member of Parliament Lapinlahti Jukka Laiterä (221) Corporate management consultant Turku Anne Panttila (221) Director of Finance and HR Vantaa Satu Tietari (217) Executive Director Säkylä Helena Haapio (217) LL.M. Helsinki Minna Karhunen (217) Director General Karkkila Jyrki Kasvi (221) Member of Parliament Espoo Mikko Kautonen (217) Graphic designer Lahti Janne Laulumaa (221) Electronics employee, Chief shop steward Raisio Anne Liimola (221) Regional representative of the Trade Union of Education for Pirkanmaa Tampere Lasse Lindholm (217) Key Account Manager Turku Salla Luomanmäki (221) Executive Director Helsinki Katja Porvari (221) Laboratory Manager Oulu Kari Ruonti (221) Entrepreneur Turku Reijo Salmi (217) Collective bargaining representative Tampere Eero Seppänen (221) Special Education Teacher Sipoo Tapani Tölli (217) Member of Parliament Tyrnävä Harry Wallin (217) Member of Parliament Seinäjoki

48 48 / 53 OWNERS OF KALEVA S GUARANTEE CAPITAL 31 Dec. 216 Shares % Votes* Sampo Plc 15, 3 9 Varma Mutual Pension Insurance Company 15, 3 9 Osakevarma Oy 1, 2 6 Mandatum Life Insurance Company Ltd 5, 1 3 If P&C Insurance Company Ltd. 5, 1 3 Total 5, 1 3 *before voting rights were cut, 3 votes/5, shares Representatives who represent roughly 235, policyholder-shareholders in the Annual General Meeting have a total of 3 votes. Owners of the guarantee capital have a total of 3 votes prior to voting rights being cut in accordance with chapter 5, section 9 of the Insurance Companies Act.

49 49 / 53

50 5 / 53 KALEVA S BOARD-APPROVED TARGETS PERTAINING TO THE DISTRIBUTION OF SAVINGS INSURANCE AS OF 1 JAN 23 General The following principles are intended to provide a clear explanation of the central grounds for how the bonuses applied to savings insurance policies are determined. The precise mathematical calculation model also includes various annual matchings applied to the entire portfolio, as well as product-specific differences between calculation parameters. Kaleva retains the right to change the principles and the details of the system at any time. These targets pertaining to the distribution of bonuses are not part of the insurance contract. Targets pertaining to the distribution of savings insurance bonuses The objective of Kaleva s bonus system is to distribute the surplus generated by the insurance as bonuses credited to the insurance policies as equitably as possible, reasonably taking into account both the total amount of the bonuses credited to the insurance policies and, in terms of how they are to be distributed, the amount of the surplus generated by these insurances and how the surplus is formed. The bonuses must not jeopardise the fulfilment of the legal solvency requirements or the continuity of the bonus level. The bonuses on savings insurance policies are made up of two parts: the annual customer bonus and a supplementary bonus determined upon the expiry of the insurance. A life insurance savings policy in this respect means insurance that pays out a savings sum upon expiry of the policy. Those Optimi insurance policies whose main purpose has been solely to maintain risk cover, on the basis of the premiums paid, are not considered savings insurance policies. Customer bonus Kaleva s Board of Directors decides annually on the amount of the customer bonus, which is added to the policy s insurance savings and is brought to the attention of the policyholder in a letter sent out every year. Kaleva may stop granting customer bonuses temporarily or permanently, but it cannot withdraw customer bonuses that have already been granted. Supplementary bonus (i.e. terminal bonus) In addition to the assets covering the insurance savings and the solvency margin required for savings insurance, the company has substantial surplus assets related to savings insurance. According to the Insurance Companies Act, a reasonable proportion of this surplus must be refunded to those who take out savings insurance policies. For the purposes of refunding this surplus, a supplementary bonus determined at the expiry of the policy has been developed alongside the annual customer bonus. The goal is to distribute the supplementary bonus among the insurance policies in accordance with the principle of accrued rights. The principle of accrued rights eliminates the possibility of speculating on additional premiums and surrenders. The amount of the supplementary bonus depends not just on the company s solvency, but also on the insurance assets in the year in question, and on the technical rate of interest, the customer bonuses and the company s capital returns. The bonus and return history has been followed up on since 1993, after which time most of the company s surplus wealth was created. The calculated share of the insurance assets is calculated for each savings insurance policy from 1993 or from a later year in which the insurance was granted. The calculated share of the assets grows or shrinks annually according to the return on the company s investments (up to 24, return on total assets). Insurance premiums paid during the year or partial surrenders of savings are taken into consideration in the calculation. The insurance savings and the minimum solvency margin linked to the insurance are deducted from the assets that are calculated as described above. Eighty per cent of the difference achieved through this calculation is paid as a supplementary bonus when the insurance expires, upon the death of the insured or on the agreed date when the savings are paid out. The amount to be granted in connection with

51 51 / 53 KALEVA S BOARD-APPROVED TARGETS PERTAINING TO THE DISTRIBUTION OF SAVINGS INSURANCE AS OF 1 JAN 23 a full surrender is 7 per cent, if the insurance has been valid for at least 15 years. For every year short of that, the bonus is reduced by 7 percentage points. In connection with partial surrenders, no supplementary bonus is paid. In accordance with the calculation bases, the supplementary bonus can be raised or lowered at any point. The supplementary bonus is, however, adjusted at least once a year. The supplementary bonus is determined on the grounds of the payment date of the benefit. Kaleva can, at any point, change the grounds for granting the supplementary bonus. Other The conclusion that can be drawn from the table is that surplus assets linked to savings insurance policies grew, for example, in 212 and 213, but decreased in 21, 28 and 211 as a consequence of unfavourable stock-market development. The next table shows the dependency of the bonus to be paid in surrenders on the period of validity of the insurance policy. Return on Kaleva s investments and returns granted, Return on investments* * Until 24, return on assets; from 25 on, net return on capital employed at fair value. Returns granted % 8.% % 8.% % 7.7% % 7.2% % 6.5% % 6.5% % 9.% % 8.% % 7.5% 22.1% 7.% % 6.% % 6.% % 5.% % 5.% % 5.% % 4.5% % 5.% % 4.5% % 4.5% % 4.5% % 4.5% % 4.5% % 4.5% % 4.5% % Distributable share of surplus assets in a surrender Effective year In 216, the supplementary bonus was raised on the basis of Kaleva s investment performance on 9 March. Starting in 24, limits were set on making additional investments in existing insurance due to the decline in the general interest rate level Bonuses on risk insurance policies Most savings insurance policies also include risk cover, meaning the death benefit without bonuses exceeds the amount of the insurance savings. The surplus from risk insurance policies is distributed in individual life insurance policies by increasing the death benefit. In the table on the next page, under Claims paid on individual life insurance policies without bonuses (MEUR), the line On policies terminated due to the death of the insured contains the combined sum, without bonuses in the event of death, of both insurance savings and risk cover. In the same table under the heading Average increase in claims paid due to the supplementary bonus and the increases in death benefits (MEUR), the line On policies terminated due to the death of the insured contains the amount of supplementary bonuses paid in the event of death (distribution of surplus from savings insurance policies) and the line Death benefit increases contains the amount of bonuses paid in the event of death (distribution of surplus from risk insurance policies). Kaleva can, at any point, change the grounds for increasing death benefits.

52 52 / 53 KALEVA S BOARD-APPROVED TARGETS PERTAINING TO THE DISTRIBUTION OF SAVINGS INSURANCE AS OF 1 JAN 23 Realisation of targets MEUR Claims paid on individual life insurance policies without bonuses On policies that expired at term On insurance policy surrenders (1) On policies terminated due to the death of the insured Total Bonuses Supplementary bonuses On policies that expired at term On insurance policy surrenders On policies terminated due to the death of the insured Death benefit increases Total Customer bonuses Total PERCENTAGE Average increase in claims paid due to the supplementary bonus and the increases in death benefits On policies that expired at term 35.2% 37.3% 36.7% 48.6% 58.4% 96.% 58.3% 83.% 82.2% 97.3 % 95.5% 99. % 73.1 % 118.3% On insurance policy surrenders 4.6% 5.% 8.3% 9.6% 14.9% 17.8% 14.% 25.7% 34.8% 27.2% 26.4% 74.1% 59.3% 41.5% On policies terminated due to the death of the insured 23.3% 24.1% 41.4% 53.% 56.9% 45.1% 38.8% 52.1% 61.8% 55.6% 59.2% 71.2% 83.3% 88.9% Total 18.5% 23.% 29.6% 43.1% 44.8% 45.2% 37.6% 65.6% 58.1% 56.% 57.5% 82.3% 71.9% 88.2% Customer bonuses 1.5% 1.5%.5%.5%.5%.%.5%.%.%.%.%.%.%.% (1) Includes full surrenders leading to the expiry of the insurance policy as well as partial surrenders in which the insurance does not expire.

53 53 / 53